(MONEY Magazine) –

HOW THE MARKET FARED

Foreign stocks continue to lead: Morgan Stanley's EAFE index has gained 24% during the past year.

NOTES AND SOURCES: Unless otherwise noted, data as of Sept. 22 from Lipper, New York; 877-955-4773. Index levels from Bloomberg. Bond index data from Lehman Brothers. Stock data as of Sept. 23 from Thomson/Baseline. Monthly S&P 500 ratios as of Sept. 21. Ratios are based on previous four quarters of earnings. [1] Annualized. [2] Price change only.

BEHIND THE HEADLINES

A Profitable Spin for Shareholders

• Spin-offs, stocks created when a company sells off a division to its shareholders and the public, may seem as appealing as hand-me-down clothes. Why invest in cast-off stocks? Because they can be profitable. Several well-known recent spin-offs, including retailer Coach (COH) and scientific-instrument maker Agilent Technologies (A), have crushed the market during the past year.

That's no anomaly, according to research by two finance professors at Penn State's Smeal College of Business: In the first three years of independence, the average spin-off beat the market by 31%. Pinnacle Value Fund manager John Deysher thinks that's because spin-offs aren't hyped by investment banks the way initial public offerings are.

A winning spin-off is often the result of the sale of a fast-growing division stuck in an otherwise weak company, says Al Cardilli, an analyst with Spin-Off Advisors, a Chicago research firm. He cites the spin-off of shoe retailer DSW (DSW) in June from Retail Ventures (RVI), which owns a struggling department store chain. DSW is up 14.2% since, while the parent is down 13.7%.

Steer clear of spin-offs loaded up with the parent's debt. "When [shares of] spin-offs fail," says Deysher, "the majority of the time it's because of a bad balance sheet." That's what happened to Agere (AGR), a 2001 Lucent (LU) spin-off that was weighed down by $2.5 billion in debt.

SPIN CYCLE

These five S&P 500 stocks (all spin-offs) have trounced the broader market during the past year.

NOTE: [1] For the past 12 months through Sept. 28. SOURCE: Thomson/Baseline.